What happens if your business hits hard times and is no longer able to offer an employee bonus scheme? Clare Parkinson explains.

The high street retailer, John Lewis, has warned that its annual staff bonus is under threat for the first time in more than 60 years, while reiterating that full-year profits would be 'substantially lower' than in previous years.

This news may come as a shock to current employees, who received a five per cent bonus for 2018.

Before a decision is made to stop providing bonuses to employees, it should first be established if the bonus is contractual or discretionary.

Discretionary or contractual benefits?

Discretionary benefits are monetary awards that are provided to the employee purely at the employer’s discretion. These benefits have no set qualifying criteria, and can be removed or amended as and when the employer wants.

Contractual benefits are paid in accordance with the terms of an employment contract, and therefore cannot be changed or removed without agreement from the employee. If a bonus is a contractual entitlement, employers will need to get employees’ agreement before it can be amended or withdrawn; this is the case with any contractual entitlement.

Obtaining agreement is likely to involve a period of consultation with the employee to discuss why the company can no longer continue to provide it. Because of the obvious detrimental impact on employees, it can be difficult to get agreement from them, and an employer may consider enforcing the change by dismissing employees on their current terms and re-engaging them with the change enacted. However, as this would involve a dismissal, the employer must be able to demonstrate that they have a good business reason for removing the bonus if they are to avoid an unfair dismissal claim.

The situation is less complicated for new employees, who can simply be provided with a set of terms and conditions which do not include a bonus entitlement.

The problem between discretionary and contractual bonus schemes is that a scheme may be labelled discretionary but, because of the way it has been operated, is not.

For example, a bonus may start off as discretionary, but may become an implied term in a contract of employment if the employee can demonstrate that payments have been made regularly over a number of years and have come to be expected, though this will depend on the specific facts of the case. Employers should review the scheme to see how regular the bonus has been distributed, and if there have been any occasions over previous years where it has not been.

In the future, they can also attempt to avoid this by clearly stating in the contract that benefits form part of a discretionary bonus scheme, outlining that the employer reserves the right not to award it and that it can be withdrawn at any time.

About the author

Clare Parkinson is pay and reward manager at Croner, which specialises in HR, health and safety and tax and reward, offering software and services to businesses.